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At the heart of the card payments industry is the “four party model”, which, simply stated, works as follows.An acquiring bank charges the merchant that accepts a card payment a “merchant service charge”, and out of this, pays the issuer of the card used for the transaction an “interchange fee”.Through this model, issuing banks are rewarded for issuing payment cards, acquiring banks are rewarded for enabling card payments at merchants, and merchants are rewarded with guaranteed payments for more sales.The consumer pays nothing.This model underpins what I have always regarded as one of the great wonders of modern civilisation: namely, that as consumers we can use a simple piece of plastic to obtain goods more or less anywhere in the world.And we get this service for free.

So as both a consumer and a card payments professional, it dismays me that governments and regulatory authorities the world over seem determined to undermine the four party model by forcing down interchange fees.The law of unintended consequences suggests that such government meddling will end in tears.In particular, it upsets me that the regulatory activity tends to be justified in terms of protecting the consumer, since my hunch is that as consumers, we will end up paying more.

Last month, a textbook example of this process in action was provided by the passing in the US of the so-called Durbin amendment to the Dodds-Frank act.This puts a cap on interchange fees for most debit card payments of 21 cents; a big reduction on the previous average of 44 cents.Bank of America then announced that it will be charging its debit card customers $5 per month in order to compensate for lost interchange income, and other big banks are expected to follow suit.In other words, consumers end up paying more.

The latest development in this sorry tale has seen Senator Durbin publicly encouraging Bank of America’s customers to switch banks – a highly questionable response from someone who is presumably representing the powerful merchant lobby.In response, Bank of America have for now backed down and reversed their decision to charge a monthly fee, but my bet is that only means they will find another way to pass on the costs to consumers, but in a less transparent fashion.

Admittedly this is a complex and emotionally charged issue with arguments to be made on both sides.But all the more reason for government to think very carefully before attempting to distort the market by messing with a model which has worked well for many years.Perhaps the backlash will encourage politicians to act more thoughtfully and honestly in the future.